-
The explosive growth in the mobile space over the past few years, coupled with expectations of further growth, has pushed the valuations of telecom companies to new highs. Pure-play mobile operators have experienced the strongest value creation with valuations of companies throughout the world increasing at an average annual rate of 31 per cent over the past few years.
India reflects this global trend. The enterprise valuation of Vodafone Essar (formerly Hutchison Essar) has grown by two to three times from $10 billion in 2006. Bharat Sanchar Nigam Limited (BSNL), India's highest revenue generating telecom firm, recently estimated its market value at $100 billion.
Though the valuations of telecom operators have been on the upswing, in the past two months, the markets caps of these companies have fluctuated due to volatility in the stock markets. tele.net has compiled the market valuations of four listed telecom operators. Since these players are engaged in a major capital investment drive and have negative cash flows from operations, conventional valuation yardsticks such as the price-earnings (PE) multiple may not portray the full picture.Hence, other valuation indices like enterprise value (EV)/EBITDA and EV/sales have also been considered.
Bharti Airtel: In the lead
With a fairly large scale of operations, extensive coverage, excellent brand equity and a healthy balance sheet, Bharti Airtel has a market capitalisation of Rs 1.5 trillion, the highest amongst all telecom operators in India. At 38.5, Bharti's PE multiple is also quite high. The company is also in the lead as far as EV/sales and EV/subscriber figures are concerned.
According to a recent industry report, Bharti Airtel took top honours on the shareholder performance index amongst communications, media and technology (CMT) firms throughout the world. Its performance was five times better than the average CMT firm. China Mobile, which had a market capitalisation of $346 billion as of end-2007, was second on the performance index.
Despite recent concerns regarding spectrum allocation and the potentially higher competitive risks posed by mobile number portability and the entry of new players, market experts believe that Bharti Airtel's stock will continue to do well. The company is facing spectrum shortage in only the top 20-25 cities (where investments are being made to increase capacity). It has adequate spectrum for further growth in Category B and C circles.
Bharti seems to be well positioned to sustain the current growth and profitability in its mobility business. Its scale of operations and execution capabilities enable the company to compete aggressively on both pricing and customer retention fronts.
Reliance Communications: Catching up fast
With a pan-Indian wireless network and an integrated business model, Reliance Communications Limited (RCOM) offers a comprehensive mix of voice and data services. While this enables the company to tap opportunities in the Indian market, its extensive global presence, larger than that of other Indian operators, allows it to perform well in the international market as well. With a market capitalisation of Rs 1.2 trillion, the company is second in terms of market capitalisation and seems to be catching up fast with Bharti Airtel. RCOM also has a massive capex programme of $6 billion.
RCOM's PE multiple, at 43.8, is higher than that of Bharti Airtel. However, in terms of earnings per share (EPS), the company lags behind Bharti Airtel.According to market research firm Edelweiss, at a stock price of Rs 685 (as on February 4, 2007), RCOM was trading at an EV/EBITDA of 12.7x FY09E (fiscal year 2008-09, expected) and 10.3x FY10E.
However, RCOM is yet to face its biggest test. As it launches pan-Indian GSM operations, the company will have to compete with entrenched GSM counterparts like Bharti Airtel, BSNL and Vodafone Essar.
The proposed listings of Reliance Infratel and Reliance Globalcom (whose subsidiaries include Yipes and Flag Telecom) and the internet protocol TV (IPTV) and direct to home ventures are expected to be increase the valuation of RCOM further.
Idea Cellular: Rapid growth expected
Idea Cellular, in which Tata divested 49.8 per cent stake at Rs 41.5 per share in June 2006, is making the best of its market opportunities. As of March 10, 2008, the company's market cap stood at Rs 256.5 billion. According to research and securities firm Motilal Oswal, on the basis of its performance in the third quarter of 2007-08, Idea is trading at an EV/EBITDA of 11.8x FY09E and 9.2x FY10E, and at a PE of 24.2x FY09E and 18.7x FY10E.
According to the company's annualised third quarter performance for 2007-08, the EV/sales and EV/EBITDA are 7.8x and 23.4x respectively. Based on these two indices, Idea traded at 13.3 per cent discount vis-Ã -vis Bharti Airtel. Idea also lags behind Bharti Airtel in terms of EV/subscriber (which reflects the future cash flow potential). According to industry experts, the valuation discount of Idea leaves potential for capital appreciation.
While the company has the highest PE multiple of 54 amongst all telecom operators in India, its EPS is very low at Rs 3.91 as on March 10, 2008.However, according to experts, Idea's valuation, which is currently one-tenth that of Bharti Airtel, is going to increase rapidly as the company has now got a pan-Indian licence. It is awaiting start-up spectrum.
The plans for a pan-Indian scale-up, the expectations of higher margins from national long distance services, the scope for unlocking value and better access to passive infrastructure (through the recent formation of Indus Towers), all point to an increase in valuation in the near future for Idea.
MTNL: Long way to go
According to Edelweiss, at a share price of Rs 123 (as on February 20, 2008, Mahanagar Telephone Nigam Limited's stock (MTNL) was trading at a PE of 17.1x FY09E and 15.3x FY10E. The company has an EV/sales ratio of 1.1, lower than that of Bharti, RCOM and Idea. While the company's valuation on an absolute basis seems attractive, the negative outlook on core business growth and profitability, in addition to the lack of significant earnings, may push its valuation down further.
In light of limited opportunities in the domestic telecom space, MTNL is aggressively looking at expanding its operations in overseas markets like Sri Lanka and Nepal through acquisition of telecom licences. Winning licences abroad adds to the company's valuation. The uptake of broadband/IPTV services could spell an increase in the number of high ARPU wireline users, leading to better revenue growth and profitability.
The PE multiples of Indian operators are the same as those of many other Asian operators. This is despite the fact that most of the latter operate in markets with considerably higher penetration levels and consequently lower growth. For instance, Smartone, a Hong Kong-based service provider operating in a market with 100 per cent penetration, was recently estimated to have a year-forward PE multiple of 19.1 (based on the closing price of its stock on December 10, 2007). China Mobile and China Unicom, which also operate in markets with high penetration, have PE multiples similar to those of Indian operators.
Given the low penetration levels in India and the expected sharp rise in the number of subscribers over 2008-12, there is every reason to believe that the current valuations of telecom companies will increase in the future.
